Martin Armstrong Warns The West: “Sanctioning Russia Is A Big Mistake”

Martin Armstrong Warns The West: “Sanctioning Russia Is A Big Mistake”

Via ZeroHedge Armstrong Economics:

“Politicians just keep making the same mistake over and over again. They perpetually turn to sanctions bankrupting private business with no respect whatsoever as the USA is wiping out farmers in Europe. But worst of all, there is not a single incident where sanctions have EVER worked even once. They often remain in place beyond a decade even as in Iran, but there is no change in politics.”

MickyMouseClub

 

Three more points on sanctions against Russia:

  1. “Isolation” means broader import substitution and rapid re-industrialization of Russia’s oil & gas sector. Dr. Sergey Glazyev, full member of Russian Academy of Science, has been developing the theoretical framework for the second “revolution from above”  since the early 1990-es. For a number of reasons (including Russia’s wicked climate, of course) scientific, industrial and technological revolutions were often triggered by sanctions.
  2. Decades of economic sanctions made the Islamic Republic of Iran and the Soviet Union stronger. Both China and Iran have learnt the lesson of “Catastroyka” – total destruction of the national state (term introduced by philosopher, ex-dissident Alexander Zinovyev (“Perestroika” + “catastrophe”).
  3. Current turmoil that erupted in Russia’s foreign exchange/stock market will not affect the industrial sector. Barclays’ oil forecast assumed Russian oil production of around 10 million barrels a day would decline slightly by 20,000 barrels daily next year because of the sanctions (compare it, for instance, with hysterical fearmongering in the Russian “business” media).

Read more:

Punitive Isolation Will Do to Russia What Versailles Treaty Did to Germany by 

Has Ukraine Shot Itself in the Foot With Gas Pipeline Deal?

Has Ukraine Shot Itself in the Foot With Gas Pipeline Deal?

Last week, Ukrainian Prime Minister Yatsenyuk pushed a bill through the Verkhovna Rada that would see his country’s gas transportation system sold off to a group of international investors. The provisions of the law would permit the transit of natural gas to be blocked. This decision may hurt the fragile industrial recovery in Germany and finish off Ukraine’s potential as a gas transit route to Europe.

Germany, which is the industrial heart of the European Union and a major creditor for its debtor nations, is facing the challenge of the double-edged consequences of its inverted Ostpolitik as it pertains to the trade in natural gas. Even the temporary transit risks ensuing from Kiev’s decision to block the pipeline may cause a business slump.

The Nobel laureate Joseph Stiglitz offered an unnerving forecast for the German economy. The Columbia University professor, speaking at the conference in the southern German city of Lindau, described economic growth in the Eurozone as “sluggish.” The German economy in particular failed to grow during the second quarter, threatening the EU’s fragile industrial recovery.

In the years to come, coping with Kiev’s attempts to jeopardize the gas-transit system and cut off Europe from its quintessential energy source in the east could become a real headache for Germany’s foreign minister, Frank-Walter Steinmeier. The most vivid example of Ukraine’s self-destructive policy that has the potential to affect European taxpayers is the recent sale of its gas transportation system.

The imminent agreement, with many conflicting political overtones, will allow sales of 49 percent of Ukraine’s gas transportation system to a cobbled-together coalition of foreign shareholders.

First, the non-transparent deal — sponsored by high-ranking government officials — is a textbook case of restrictive practices that violate World Trade Organization rules. Secondly, the pipeline itself is anything but an attractive offer.

The major players in the European energy market are very well aware of the quality of the asset. They know that the pipeline is sorely in need of repair and is dependent on gas from a third party. According to some provisions of the law, the transit of natural gas through Ukraine can be blocked. If it really happens, the pipeline’s price will immediately plummet to $2 to $3 billion.

Who would buy a broken-down car that can only run using your neighbor’s gas?

ukraine_germany_gas_priceThat’s why, in July, Prime Minister Yatsenyuk was so interested in pushing the bill through the Verkhovna Rada that he threatened deputies with his resignation. Last week Mr. Yatsenyuk finally succeeded in passing the buck.

For many years, Ukraine has argued that its gas transportation system is an asset of national importance that wasn’t for sale. But the Euromaidan protests changed everything. Ukraine’s new media reported that Chevron wants to buy into the country’s transit company. While the official representatives of the corporation declined to comment on the “rumors,” last year Chevron co-sponsored a conference, “Ukraine in Washington 2013,” which starred the U.S. Assistant Secretary of State Victoria Nuland. Her deep involvement in Ukrainian politics, along with her unorthodox but honest vision of the EU, is generally well known.

In passing the new law, government officials in Kiev and the Verkhovna Rada (now dissolved) ignored the fact that the majority of business-savvy Ukrainian voters would never approve the all-Ukrainian referendum on the summertime sale of the country’s last reasonably valuable asset. After all, the industrial region of Donbass has been irrevocably lost and the country needs to collect taxes.

The situation surrounding the pipeline deal is reminiscent of the tactics of the United Fruit Company in the mid and late 1960s. Radically right-wing governments were installed in Central and Latin America and that corporation gained control over those countries’ main export, bananas.

In Eastern Europe, many countries are not ready to follow Ukraine’s footsteps and renounce energy sovereignty. It’s no longer fashionable to be a banana republic. The deep-seated crisis in Ukraine and the success story of Nord Stream have encouraged other EU countries, such as Hungary, to diversify their natural-gas supply routes. Hungary’s secretary of state for public diplomacy and relations, Zoltán Kovács, recently quoted a statement from his country’s prime minister, Viktor Orbán: “No one can question our sovereign right to guarantee our natural gas supplies.” The leaders in Budapest are sure that no economic recovery is possible in Germany and EU without long-term natural-gas contracts. All EU members will benefit from stable regional trade patterns.

Events in Ukraine should not dominate the agenda of the whole continent. That would simply be dangerous. It has already become a cliché to compare the Ukrainian crisis with the Spanish Civil War. A couple of years ago, the total “Ukrainization” of EU policy would have been perceived as a bad joke. Today 300,000 jobs are at stake in Germany and it is high time for Berlin to step in and prevent the nationalist frenzy in Kiev from ruining decades of successful business cooperation. Heiko Lohmann, a German natural-gas expert, believes that a fundamental prerequisite for normalization is the continuity of energy relations.

Viewed from this perspective, Hungary’s position looks much more “pro-European.” Interestingly, the EU’s official energy policy papers (the European Ten-Year Network Development Plan (TYNDP 2011-2020) and Energy Infrastructure Priorities for 2020 and Beyond) contradict the hardline political statements of the acting members of the European Commission. According to the published data, Brussels expects to increase natural gas imports from Russia up to 40 percent. Time will tell whether Ukraine’s problem-plagued gas transportation system will play any role in these plans.

Originally published by OilPrice.com

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The Real Reason Shell Halted Its Ukrainian Shale Operations

Kiev Should Stop Playing Politics With Gas Debt

Kiev Should Stop Playing Politics With Gas Debt

Ukraine’s energy system can stay afloat only as long as the country’s underground gas-storage facilities are full. But by the end of the year the government in Kiev may start siphoning off natural gas destined for the European market.

The issue of natural gas has divided European opinion on the civil war in Ukraine. Brussels’ plan to force EU members into “energy solidarity” with the disintegrating state of Ukraine and to use illegal reversed gas flows is losing support. “The EU has no intention of repaying Ukraine’s debts for Russian gas,” said Dominique Ristori, the director general of the European Commission’s Directorate-General for Energy, adding that all debt problems should be settled through the International Monetary Fund.

The reference to the IMF is worthy of note. According to the Fund’s official statements, it will offer assistance to Kiev only if President Petro Poroshenko’s “Drang nach Osten” in the Donbass region is successful. Therefore, the end result of the civil war may affect Ukraine’s ability and willingness to pay its debts. The IMF has also given strict guidelines for Ukraine’s international reserves and has set cash-shortage limits for debt-ridden joint-stock gas company Naftogaz Ukraine.

(The IMF demanded an increase of up to 40 percent in residential gas rates by May 2015. The rates will go up 20 percent  every year until Naftogaz Ukraine’s gas debt has been paid.)

Historically, countries left on their own in talks with the IMF have often found themselves in danger of sovereign default. The IMF today is anything but a welfare institution — it does not normally assist countries engaged in war.

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Ukraine’s government will have to increase domestic gas prices to reach a level on par with the IMF’s standards. This means that in 2015, the Euromaidan babushkas will receive their first 250-euro monthly gas bills. Ukraine’s energy officials often mention their ambitious plans to use fracking or reverse flows from Slovakia and Poland to make up for any gas shortfalls. In reality, the so-called “big gas reverse from Slovakia” would provide for only about 15 percent of Ukraine’s gas needs (after deducting the natural-gas consumption in the Crimea and the Donbass region). In any event, the price of this reversed gas would probably be close to the European contract price.

In regard to fracking, Ukraine’s shale projects are either half-dead or have been officially halted. The European Commission is much more skeptical about shale gas than it was two or three years ago. “Shale gas extraction will bring about no significant reduction in Europe’s dependence on gas imports,” claimed European Energy Commissioner Günther Oettinger in an interview with B.Z. am Sonntag. Oettinger said that in the long-term future, Europe will be able to cover around one-tenth of its overall need for gas by using fracking technology.

Therefore, the government in Kiev may start siphoning European gas out of Ukraine’s transportation system in order to make up for a shortage of natural gas despite all its solemn promises. The media’s fear mongering will be used to portray social unrest as a threat to national security. Meanwhile, Ukraine’s smart prime minister, Arseniy Yatsenyuk, announced his resignation in response to parliament’s failure to pass gas legislation (abandoning the sinking ship of Ukraine’s economy just in time).

In July, Ukrainian Energy Minister — and Yatsenyuk’s successor — Volodymyr Groysman, announced Kiev’s midterm plan. He does not think that either the $5.3 billion Ukraine currently owes for gas or its refusal to make regular payments “will stop Ukraine from buying gas from Russia.” In the light of Ukraine’s newfound European identity, Mr. Groysman should try this tactic during talks on receiving reverse gas supplies from Slovakia and Poland.

However, if the solidarity with Europe plan does not work out, Kiev’s last resort will be its notorious tactic of “taking without paying.”

“We know from experience that in winter and autumn Ukraine needs natural gas. And it may be — if you’ll forgive me – that they will begin to steal it,” predicts Sergey Ivanov, the chief of staff of the presidential administration of Russia.

The punitive operation in eastern Ukraine has ruined the country’s reputation as a reliable transit route. The recent shoot down of a passenger airliner in Kiev’s zone of control is a sign that it’s actually a zone of chaos, and it’s widening. But the solution to the transit problem, at least, is obvious: Kiev should pay its bills and stop using political arguments in its gas talks.

Originally published by OilPrice.com

The Real Reason Shell Halted Its Ukrainian Shale Operations

The Real Reason Shell Halted Its Ukrainian Shale Operations

Royal Dutch Shell has blamed air strikes by the government in Kiev against its own citizens in southern Ukraine as the reason it decided to declare a halt to its shale oil projects in the troubled region. In reality, the truth may be closer to the fact that company is disappointed with the economic viability of what it once thought was a large shale deposit and is looking for a way out.

After a series of dramatic statements and the signing of a $410-million letter of intent, a veil of uncertainty is being drawn around the myth of Ukrainian shale. Royal Dutch Shell CFO Simon Henry said in an interview with Bloomberg TV that the decision was prompted by the need to protect the company’s business interests in Ukraine.

By walking away, Shell will be able to “freeze” its involvement in the failed initiative while simultaneously minimizing the damage to its reputation. In accordance with the contract, Shell’s Ukrainian counterparts will, in the end, have to wait another 50 years to get their hands on that long-awaited “freedom gas.”

Shell will also be able to demonstrate its concern for its employees who work in the region where a brutal civil war is on the verge of breaking out. “Shell is in the East, and there’s a security risk there,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics.

According to a recent statement by the former head of Royal Dutch Shell, Peter Voser, “the company is now analyzing its business in shale,” which, translated from the streamlined language of press releases, means: The project is not earning its keep and we need to do something (Read: write off expenses).

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A little background: In January, 2013, Shell, along with Nadra Yuzivska, LLC and the Ukrainian government, signed a production-sharing agreement for the exploration, development, and extraction of hydrocarbons from the Yuzivska site (8,000 sq. km), a geological formation located in the Kharkiv and Donetsk regions.

By the middle of that same year, the company had lost $2.4 billion on shale gas deposits in the U.S. and was forced to document a very large drop in profits — 60 percent over the same period in 2012.

Shell’s first disappointment in the Ukrainian gas market turned out to be related to the quality of the metal in the pipes that Ukrainian post-Soviet industry was capable of providing. At the time, company spokesmen claimed, “We have repeatedly stated that we are prepared to use Ukrainian goods, provided that the price and quality can meet that of foreign equipment.

But at this stage, those pipes do not yet exist in Ukraine. Shell lobbied Ukraine’s Interdepartmental Commission on International Trade to have seamless steel casing pipes and production tubings with an outside diameter of up to 406.4 mm. brought in from Japan. Of course it was impossible to avoid having all this reflected in the final price of the project.

In March of 2014, it became clear that the Belyaevskaya-400 well Shell had drilled in the Pervomaysk district of the Kharkiv region in search of shale gas was not going to return a profit. Not only were there no pipes, there was no gas. “Gas was not found in our district. Exploration work proved that it wasn’t there,” the head of the Pervomaisk district state administration of the Kharkiv region, Viktor Namchuk, admitted on Feb. 28, 2014.

As in many other Eastern European countries, optimistic predictions about the amount of recoverable shale gas turned out to be several times higher than the realistic assessment of the reserves.

Likewise, Ukraine’s neighbors – Lithuania, Bulgaria, and Poland – have also seen shale projects shut down because they turned out to be less than economically viable. By the spring of 2014, Total, Chevron and Eni had also abandoned many shale projects in Eastern Europe for various reasons.

The current heated situation in Ukraine means that politicians in the EU and U.S. cannot announce the suspension of exports from the “shale revolution” in the region, but the business community has already begun to head for the exits.

Originally published by OilPrice.com

See also:

What Happened to Eastern Europe’s Dreams of a Shale Revolution?

CNPC Deal Becomes Russia’s Gateway to Asian Gas Market

CNPC Deal Becomes Russia’s Gateway to Asian Gas Market

The recent deal between China National Petroleum Corporation (CNPC) and Russian energy company Gazprom has the potential to counterbalance U.S. energy sanctions and broaden Russia’s energy options in Eurasia. The parties have contracted to build the new “Power of Siberia” pipeline over the course of the next five years. The goal is to supply China with 82 billion cubic meters of gas, or an average of 16.4 billion cubic meters per year. In addition, the Russian minister of energy, Alexander Novak, has said the Chinese side expressed a desire to advance up to $25 billion and to abolish import duties on Russian gas.

According to Vedomosti, the Russian version of The Wall Street Journal, the contract between Gazprom and CNPC is worth a total of $400 billion and covers 1.032 trillion cubic meters of gas. The price of the contract is based on the minimum volume and includes a “take or pay” provision. The contract is fully in keeping with Gazprom’s corporate strategy to diversify its fuel shipments. Essentially, it is no different from similar agreements made with Western European consumers and the price is competitive (above $350 per thousand cm., according to various sources). The Chinese state has tasked CNPC to build pipelines and storage facilities in China under the deal.

By the end of 2014, an additional intergovernmental agreement on energy cooperation may be signed at the state level. Speaking on the feasibility of the project, Alexey Ulyukaev, the Russian minister of economic development, claimed at the recent St. Petersburg International Economic Forum that “the project is certain to be 100 percent profitable.” Moscow is considering the introduction of preferential tax treatment to make the deal even more lucrative. A new tax relief scheme will be introduced on the fields that serve as the source for supplying gas to the Chinese market.

Image Source - RIA

Chelyabinsk Tube Rolling Plant  (Image Source – RIA)

 

On a broader scale, quick accomplishment of the deal may be a direct consequence of current U.S. policy in the Eastern Europe. After the Syrian fiasco, the Obama administration threw all its efforts into establishing a puppet regime of nationalists in Ukraine. The export of chaos in the heart of Europe was meant to disharmonize East-West energy dialogue. Following Washington’s scenario, the foreign ministers of France, Germany, and Poland forgot the ancient principle of pacta sunt servanda and violated the treaty with the then-legitimate president of Ukraine. This, de facto, sanctioned civil war and brutal violence in Novorossia.

The installation of a radical government in Kiev put at risk the whole system of energy supplies to Europe. By now it seems that no one in Europe can offer an intelligible explanation why it happened. Brussels has sacrificed decades of energy stability to the myth of U.S.-EU transatlantic solidarity (problem-plagued TTIP negotiations are a good benchmark here). Now the looming threat of Ukraine’s unsecured gas debt is one of Europe’s high-priority problems. Who has reaped the benefits of the dubious Western “victory” in Kiev? Just follow the money. While U.S. Vice President Joe Biden was testing the loyalty of America’s Eastern European satellites in Romania, his son, Hunter Biden, unabashedly joined the board of directors of Ukrainian natural gas company Burisma.

Reorientation of Russia’s energy policy to Asia will hardly bring about a dramatic change in the short term. Europe is and will remain an important trade partner for Russia’s natural gas exporters. Although the planned shipments of 38 billion cubic meters of gas to China are impressive, they amount to only about 20 percent of what is currently being provided to Europe.

However, in 2020-2025 perspective Russia-China gas deal will make the market for natural gas in China. The absolute numbers are not as important as the total economic impact of long-term cooperation. For example, the Chelyabinsk Tube Rolling Plant (ChelPipe) and CNPC subsidiary China Petroleum Pipeline Material and Equipment Corporation (CPPMEC) have signed a two-year agreement for joint participation in international pipeline projects.

The east Siberian fields will also supply a planned liquefied natural gas plant in Vladivostok, which could become a gateway to other energy-hungry Asian countries such as Japan, Korea and Taiwan. All things considered, Fitch rating agency believes that the CNPC-Gazprom deal represents a significant growth opportunity for the Russian gas sector. An alternative market in the East will be positive for Gazprom’s medium-to-long-term prospects, despite all attempts to impose economic sanctions on Russia.

Originally published by OilPrice.com

See also:

Russia-China Gas Deal Infographic (RT)

Sanctions against Russia and the Negative Effect on Global Energy Security

Sanctions against Russia and the Negative Effect on Global Energy Security

After a series of headline-grabbing statements about the possibility of “switching” European consumers over to American gas, the US media hastened to announce the launch of Obama’s oil and gas offensive against Russia. In reality the EU is not currently prepared, neither technically nor in terms of price, to buy its energy resources from the US.  It would take at least ten years to adapt even the technically advanced German energy system to work with American gas supply. In a crisis, when it is particularly urgent to see a quick return on an investment, such projects are unrealistic.

Whether German industry is ready to pay more for gas from overseas just for the dubious pleasure of “punishing” someone is a big question. Unlike EU officials, the German government is not publicly calling into question either its long-term contracts with Russia or the future of the South Stream pipeline. On March 13, 2014, the chairman of the board of Gazprom, Alexei Miller, attended a meeting with the Vice-Chancellor and Minister of Economics and Energy of Germany Sigmar Gabriel. “Germany is Russia’s number one partner in Europe’s gas and energy market,” Miller stated. “Russian gas accounts for 40% of all German imports. And we’re also noting an upwards tick in the quantity of gas supplies coming from Russia.  Last year, shipments totaled more than 40 billion cubic meters and we’ve seen a 20% annual increase.” Looking at these statistics, it’s clear that all the talk about Atlantic solidarity is having zero effect on the German government’s rational decision making. “We don’t need conflict escalation”, saidSigmar Gabriel during an expert roundtable on energy policy later in March. “Russia met its obligations under the gas contracts even in the darkest years of the Cold War”.

Sigmar Gabriel knows what he’s talking about. For Europe to be able to fully utilize gas supplies from the US, it will be necessary to build expensive facilities to decompress and store the gas. Moreover, in order to incorporate the “American” gas into the existing local energy systems, the European countries would need to construct new pumping stations. The associated infrastructure will further add to the price for the end consumer. Neither the bosses of the German industry nor the responsible political leaders will support such policy.

So who’s behind the demands that Russia be punished?

Barack Obama continues to look outside of Europe for ways to pressure Moscow. It is no coincidence that the US president’s recent statements on energy policy coincided with his visit to Saudi Arabia. President Obama came to Riyadh to bring down prices in exchange for the development of Saudi Arabian facilities to extract and liquefy gas for delivery to Europe. It’s unlikely that even Charles Maurice de Talleyrand himself could have persuaded the Saudis to dump as many resources as possible onto the market in exchange for the nebulous promise of American help to obtain new gas facilities at some unspecified date in the future.

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Qatar’s position needs to be kept in mind too. There are serious personal disagreements between the Saudis and the hypersensitive former emir of Qatar as no one in the Middle East needs a new competitor in the gas industry. Obama’s attempt to repeat Ronald Reagan’s oil trick in the Middle East and “shake down” global prices will face many obstacles. A hike in oil prices below $80 would expose yet another issue that was a real controversy during Obama’s reelection campaign, namely – what to do about Iraq. Even a 10% drop in oil prices would finish off the Iraqi economy, still reeling from the US invasion. And Israel is closely monitoring the White House’s attempts to initiate a rapprochement with Iran. If Uncle Sam tries to levy energy sanctions against Russia using his political positions in the Middle East, he will quickly find he has loaded a gun only to shoot himself in the foot.

The US Secretary of Energy, Ernest Moniz, an Obama appointee and shale enthusiast, has jumped right into the discussion of “punishing” Russia. He promised to consider new efforts to ship LNG from the USA to Europe. In this particular case his verbal intervention is unlikely to reflect the position of the CEOs of the oil majors. They know very well that the industry’s real break-even points are nowhere near where they were 30 years ago due to inflation and higher operation costs. Today one facility—Cheniere’s $10 billion Sabine Pass terminal in Cameron Parish—has the required approvals from the Energy Department and U.S. Federal Energy Regulatory Commission.

In early March, the American economist Philip Verleger, who worked in the White House and the US Treasury in the 1970s, spoke as an expert on the issue of using energy as way to “punish” Russia. In the March 3, 2014 newsletter that he publishes for his clients, Verleger wrote that the US has a tool it can use to influence Russia – its Strategic Petroleum Reserve (SPR). US Reserve currently contains almost 700 million barrels of oil, five million of which were unloaded onto the market during the Washington visit of the interim Ukrainian Prime Minister Arseniy Yatsenyuk. “It almost defies logic to think there isn’t a link,” noted John Kingston, the director of Platts’ news division. Tapping the SPR to manipulate the global market would be a highly extraordinary decision. The only way to exert any real pressure on global oil prices would be to open up at least 50% of the entire SPR and grant export licenses to anyone who wanted one. The American DoE is obviously not ready for such draconian measures.

Looking at the 2014 report written by the DoE analysts who are known for their almost religious faith in alternative energy, the minimum price for oil in 2015 will be $89.75/barr. The Russian national budget in 2014, which was saddled with expenses related to the Olympics, was drawn up based on an average price of $93 per barrel. Ergo, even $80-90 would hardly spell disaster for Moscow, much less $100 a barrel. In addition, the “nonmarket” pressure by the US could be balanced by the exporter nations. For example, the idea of “energy currency” has long been a hot topic within OPEC and the Gas Exporting Countries Forum (GECF).

For the first time ever in the history of US-Russian relations we are seeing a public debate about a threat of economic sanctions that may have a long-range negative effect on global energy security. The Obama administration acts as if it is guided by a chapter out of an old Soviet textbook on political economy. At the moment, apparently, the sacred dogma of the free market, from Samuelson to Friedman, can be conveniently overlooked for the sake of punishing a sovereign nation. When the head of the most influential state in the world talks about manipulating market prices to punish recalcitrant players, what kind of “global free market” and fair play are we really talking about?

Originally published by OilPrice.com

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Hungary asserts its energy independence with South Stream

Sanctions against Russia will deal a blow to the American nuclear industry

Sanctions against Russia will deal a blow to the American nuclear industry

Nuclear energy is just one example of how America’s aggressive, expansionist policy abroad can cause real damage to key sectors of the US economy. The Democrat John Kerry, who is threatening Russia with unilateral economic sanctions, has apparently not deemed it important to anticipate the consequences of his statements even one step in advance.  Kerry’s and Obama’s global ambitions to promote “democratic values” are much more important to the White House than the jobs of ordinary Americans who are employed at nuclear power plants – but they rarely vote Democratic anyway.  

When discussing the recently popular topic of possible sanctions, observers traditionally focus on the fact that it is the relationship between Russia and the European Union that suffers the most from mutual constraints, because the economic ties between the United States and Russia have not been as strong. In this context, it’s worth remembering and mentioning an American industry that is critically reliant on one type of import from Russia – fuel for nuclear power plants.

This surprisingly significant dependency was established back in the early 90s after the launch of the HEU-LEU program, which entailed the processing of highly enriched uranium (HEU) from Russian nuclear warheads into low-enriched uranium (LEU) that was sold in the United States as fuel for nuclear power plants.

One should keep in mind that although there are plans to close some nuclear power plants (for reasons that include the low cost of natural gas in the US), nuclear energy in the United States still provides about 100 GW of power (for comparison, the entire Russian energy industry produces approximately 230 GW).

When discussing foreign imports of nuclear fuel for US atomic power plants, one must distinguish between two components, which are only partially interconnected.  First, there is the actual raw material for the fuel, which is based on natural uranium, and this also presents a problem for the Americans.  But the main issue is the capability to separate the isotopes, or in other words, to enrich the uranium.

They only produce 10% of what they need

In 2014, 48 million pounds of uranium will be needed to feed American nuclear power plants (calculated in terms of unenriched fuel in the form of U3O8 oxide).  This is the arbitrary unit we use, since the price quotes on the global market are also traditionally expressed in dollars per pound of uranium oxide.

Last year the HEU-LEU program came to a close.  In February, the EIA, the statistical office within the American Department of Energy, published data on the US production of uranium concentrate (calculated in terms of U3O8 uranium oxide) in 2013.  Over the course of two years, the output of this raw material for nuclear fuel increased by 21%.  The EIA points out that this increase partially offsets the shutdown of the HEU-LEU program.  But even with this in mind, the production of uranium oxide in the United States amounted to only 4.8 million pounds – exactly 10% of the required quantity of fuel.

Thus it is no surprise that in 2012, 83% of the uranium raw materials that were needed were purchased abroad, because the US could only meet 17% of its own requirements (this statistic probably includes the American program to convert HEU into LEU, thus the US market share comes to more than 10%).  The geographic distribution of uranium imports to the US is shown in the diagram below (a total of 58 million pounds, calculated in terms of U3O8):

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Source: U.S.  Energy Information Administration, Uranium Marketing Annual Report

Nevertheless, it’s true that no particular problems with raw materials of uranium are currently visible on the world market, which is primarily due to the shutdown of reactors in Japan and some in Europe, plus one now in South Korea.  Despite the end of the HEU-LEU program, the quotes have not risen.  As a result, prices for uranium oxide remain stable, at a low level of $35 per pound.  Back in 2006-2007, the spot prices for this raw material climbed as high as $130 per pound.

They only enrich 20% of what they need

But acquiring uranium ore or uranium concentrate is only half the battle.  The bigger issue is converting it into fuel, and the main phase of that is the enrichment process.  And this is where the American dependence on Russian imports is most apparent.  As a reminder, a business’s capacity to enrich uranium is described using what are called SWUs (separative work units).  And enrichment is currently (or to be more precise – until recently) the responsibility of private businesses in the US.

Once the HEU-LEU program began, Russian fuel spent 15 years expanding its hold on the uranium-enrichment market, shutting out “home” facilities in the US.  The United States uses about 16 million SWUs each year, of which almost six million, or 35-40% of that total, has been provided by the Russian HEU-LEU program.  Approximately the same amount comes from other foreign enrichment facilities, primarily in Europe.  On its own, the US is able to produce only about three million SWUs per year, about 20% of what it needs.

The HEU-LEU program ended this year.  However, an agreement has been signed to extend the contracts.  Although strictly speaking this is not an extension of HEU-LEU, but rather the sale of commercial supplies of low-enriched uranium.  Under the new agreement (for 2013-2022), the contract assumes a gradual increase in deliveries, so that by 2015 those will make up about half the level of shipments that were seen under the “old” HEU-LEU program.

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Source: U.S.  Energy Information Administration: Form EIA-858, Uranium Marketing Annual Survey

It remains an open question as to what extent Russian imports under the new contracts will replace the HEU-LEU program in 2014.  But America’s capacity is truly limited to the three million SWUs already in use, as can be seen in this table.  The old uranium-enrichment plant belonging to USEC, a subsidiary of an American corporation, is now closed.  A new one has not yet been built, and it is possible that the completion of its construction is being delayed because there is a good chance USEC will declare bankruptcy.  The remaining American capacity is generated in the US by Europe’s URENCO, which accounts for those three million SWUs in question, but by 2015 that number is expected to rise to six million SWUs.  For comparison, Russia produces 25 million SWUs.

The US can only make up for the missing enrichment capacity from Russia by increasing the amount it orders from abroad, and even that will only help in part.  Just as with uranium raw materials, the US is benefiting from the fact that so many nuclear power plants around the world are closed (thus the cost of one SWU has decreased in recent years to as little as $100).  But if Japan restarts its shuttered reactors this summer, the alternatives to Russian LEU will vanish altogether.  In any case, contracts have already been signed to continue with the Russian imports, and those deliveries have already begun – so if mutual sanctions go into effect, the American nuclear industry will experience significant hardship.

Originally published in Russian by ODNAKO Magazine (odnako.org) – Alexander Sobko

Russia chooses ‘soft’ approach to the Arctic

Russia chooses ‘soft’ approach to the Arctic

The extraction of minerals in the Arctic has become a hot topic after the Parliament of Norway opened up a new area on the fringe of the Arctic Ocean to offshore oil drilling last year. For more than a decade Norway has been exploring the Barents Sea region to boost performance and counteract falling oil production. Leading EU companies have flocked to the Norwegian Arctic, encouraged by discoveries by Statoil, ENI and Total, writes the industry website, Rigzone. Russia’s oil & gas majors have followed suit.

A year later it becomes more and more apparent that technically challenging initiatives such as Arctic oil & gas exploration are in need of better protection and a clear set of rules (as noted by Norway’s former foreign minister Espen Barth Eide as early as in 2012). Prirazlomnaya oil rig incident [1] has shown once again that protective action planning is a sad necessity for all interested parties. Russian air and space defense troops have already begun deploying units in the Arctic. The development of Soviet military infrastructure in the Arctic, installation of modern radar systems and reconstruction of Northern airfields are among top priority goals.

The good news is that today all mining operations on the continental shelf must rest on a solid contractual basis, so, more often than not, the widely discussed security risks may be overblown. A military presence in the High North should not be viewed as a sign of heightened tension. On the contrary, the growing interest in more security might be a great opportunity to further improve the cooperation among the Arctic nations. A limited military prescriptive may prevent illegal border crossing, organized crime and ecoterrorism. “Everything is done transparently, logically, and is not aimed against any neighbors, is not of a destabilizing character and does not cross any ‘red lines’”, concludes Russia’s Ambassador at Large and representative at the Arctic Council Anton Vasiliev.

Trifonova Lubov, Severomorsk - The Northern Sea Route

Trifonova Lubov, Severomorsk – The Northern Sea Route

 

Arctic search and rescue (SAR) operations and oil spill response also demand broader force projection. Not coincidentally the Arctic Council gave special priority to the Arctic Search and Rescue Agreement in 2013 and established the areas of SAR responsibility of each state party. SAR operations are impossible without direct involvement of the military and the EMERCOM. As a country that is de facto in full control of the Northern Sea Route and extended continental shelf, including the Lomonosov Ridge, Russia has prepared a set of measures to maintain safety on the open sea. Such deterrent force is a timely and reasonable precaution because fast climate change has intensified the Northern Sea Route (NSR) shipping. Jong-Deog Kim, a division director at the South Korean Maritime Institute, predicted that traffic between Europe and Asia along the NSR will grow by 6.5% a year and could potentially account for a quarter of all cargo traffic by 2030.

A plan to control oil pollution risks in Russia’s future area of responsibility is currently being developed in close cooperation with specialists from Norway. The Arctic Council oil pollution task force meeting in January, 2014 was one of the latest examples of productive work in this vital sphere. Both Statoil (Norway) and Rosneft (Russia) expressed interest in oil spill regulations. Another promising initiative was the creation of a new circumpolar business forum called the Arctic Economic Council (AEC) on the basis of The Task Force to Facilitate the Circumpolar Business Forum (TFCBF) in December, 2013.

Canadian journalists stress the fact that in the light of recent military buildup the problem of the overlapping Arctic claims of Russia and Canada may “send wrong message”. Deeper analysis of political environment in the High North shows that the issue of Arctic “land grab” is highly exaggerated. All UN procedures on the matter that include the necessary legal justification to support Russia’s Arctic claim will be completed by the end of 2014, so there is no territorial dispute. The claim is backed by the detailed mapping necessary to support the bid. Russian scientists completed several geological survey expeditions and have been gathering evidence to meet the UN Commission’s criteria since 2001.

Ottawa is trying to catch up with other littoral states and create some room for diplomatic maneuvering [2]. Canada lags behind other Arctic stakeholders, Norway and Russia, in Northern economic development, believes John Higginbotham, a senior fellow at Carleton University who focuses on Arctic research. Mostly due to domestic political situation, Canadian leaders have made a number of ambitious statements, for instance, issued a Canadian passport for Santa Claus and included the symbolic North Pole in Canada’s territorial claim.

Nevertheless, such statements are mostly intended for domestic audience and should not be interpreted as a sign of conflict potential. Canada and Russia enjoy very good relations on the Arctic, a view that was confirmed by Foreign Affairs Minister John Baird in a recent interview. Ottawa hosted the meeting of the Task Force on the Arctic and the North under the Canadian-Russian Intergovernmental Economic Commission resulted in signing of a bilateral cooperation plan.

Existing international law framework and forums like the Arctic Chiefs of Defense Staff Conference provide all the necessary mechanisms to treat and resolve all overlapping claims on the basis of negotiations. In any case, there is no need for screaming headlines about “the new cold war”. Recent examples of economic cooperation prove that business has become a gateway to regional political accord, debunking popular myths about the race for resources in the Arctic.

[1]The Prirazlomnaya oil rig is, in fact, a very complex industrial object. It’s the first Arctic-class ice resistant offshore gravity platform in the world. Attempts to exert “green” pressure on the Arctic nations might be a part of a broader strategy of ambitious non-Arctic players to sneak into the mineral-rich region.

[2] The Government of Canada has submitted a preliminary application to the UN in December, 2013.

Originally published by Barents Observer

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